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Suikoden V takes place in the Queendom of Falena, portraying the events of that region of the Suikoden world six years before the events in Suikoden and 144 years after the events in Suikoden IV (~IS 449). The Queendom of Falena is a relatively rich land sustained by the Feitas River, which connects its disparate parts and enables trade and communication .

It is ruled by Queen Arshtat and her husband Ferid, who have been a balancing and steady force since the demise of her somewhat rash mother. However, the tensions of the past have not been entirely settled. Arshtat's mother and aunt had been engaged in a covert struggle for power over the succession. Falena's government also has powerful nobles who maintain their own separate forces, loyal to them. Arshtat's hand in marriage was seen as key to gaining power in the future by the nobles; a civil war was narrowly averted when Ferid, a neutral outsider, won the Sacred Games and thus the right to marry Arshtat.At the beginning of Suikoden V, the time has come for Lymsleia's Sacred Games, a gladiatorial tournament in which the winner may ask for the future Queen's hand in marriage. (As a Queendom rather than a Kingdom, the first-born female is in line for the throne.) Aside from the many freelancers, suitors, and independent nobles who desire this prize, the two most powerful noble houses both bear a special interest in it; like with Arshtat's Sacred Games, Lymsleia's hand could prove a crucial advantage. The Godwins believe that Falena needs to be more centralized, powerful and perhaps expansionistic. The Barows seek more to rebuild and trade with foreign nations. The Barows faction has of late been somewhat on the decline, though they are still powerful; a recent war with the neighboring New Armes Kingdom was fought on Barows-allied lands, while the Godwins remained safe and untouched in the west of Falena, perhaps explaining the Barows wish to not further antagonize Armes. The royal family and others worry that if a Godwin or Barows were to win, it might well trigger another struggle.

A key part of the Suikoden setting is the existence of Runes, the source of all magic. Any person can have a rune inscribed on them, although some people are more talented in their use, and others can inscribe more than one rune (with three as the general maximum). In turn, all power from individual carved runes ultimately descends from the powerful 27 True Runes, which created the world in Suikoden's mythology. Falena's national treasure is the Sun Rune, a True Rune which can both bring prosperity and growth as well as destruction and calamity. Falena also controls the "child" runes of the Sun Rune, the Dawn Rune and Twilight Rune.

However, Falena's grip on the runes has gone somewhat awry. Two years prior to the start of Suikoden V, residents of Lordlake rioted and charged the East Palace, near the capital of Sol-Falena. In the confusion, the Dawn Rune, which was housed there, was stolen. Lordlake had previously been considered the most loyal of all the towns to the royal government and granted special privileges. With this seeming act of high treason by Lordlake, Arshtat took the Sun Rune upon herself, normally stored in Sol-Falena's palace on a pedestal, and used the Rune's power to scorch Lordlake's vegetation, wildlife, and river, killing its leader Lord Rovere in the process. Since bearing the Sun Rune, the normally compassionate Arshtat has grown more and more erratic in behavior, prone to mood swings and wild fits of vengeance.

The game features significant enhancements from all the previous installments in the series, including 6-member battle parties, multiple mini-games, the homebase system, and many other new features.